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subadditivity sign in to follow this
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fat-tails sign in to follow this
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Fat Tails, VaR and Subadditivity
Year Of Publication: 2011
Month Of Publication: April
Pages: 30
Download Count: 21
View Count: 1662
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 8-6-2010
Publisher: Administrator
Summary
Financial institutions rely heavily on Value–at–Risk (VaR) as a risk measure, even though it is not subadditive. First, we theoretically show that the VaR portfolio measure is subadditive in the relevant tail region if asset returns are multivariate regularly varying, thus allowing for dependent returns. Second, we note that VaR estimated from historical simulations may lead to violations of subadditivity. This upset of the theoretical VaR subadditivity in the tail arises because the coarseness of the empirical distribution can affect the apparent fatness of the tails. Finally, we document a dramatic reduction in the frequency of subadditivity violations, by using semi–parametric extreme value techniques for VaR estimation instead of historical simulations.
This document is published in Journal of Econometrics.
http://dx.doi.org/10.1016/j.jeconom.2012.08.011
Author(s)
Daníelsson, Jón Sign in to follow this author
Jorgensen, Bjørn N. Sign in to follow this author
Samorodnitsky, Gennady Sign in to follow this author
Sarma, Mandira Sign in to follow this author
de Vries, Casper G. Sign in to follow this author
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